Diego Armando Maradona’s play against England in the 1986 World Cup in the quarterfinals has marked English society to the point that one of the Bank of England’s (BoE) monetary policy strategies bears the name of the Argentine soccer player, .
The term “Maradona effect” is used to define the management of expectations by central banks, more specifically the BoE. It can be summed up as “fainting without giving”. Only with the rhetoric of the members of a central bank can they influence the economy without the need to take critical measures. The Maradona Strategy has returned to the forefront of the British financial media with the BoE turning to the possibility of applying negative rates.
The BoE, along with the Federal Reserve, has been one of the world’s great central banks that has dodged the scourge of negative rates. But with the coronavirus crisis, its new president Andrew Bailey has softened his position to plunge interest rates to boost the economy. But for many experts it is a strategy to hint at their intentions without actually making a painful decision for a central bank.
“He’s announcing it very prominently, but that doesn’t mean he’s going to do it,” Thomas Costerg, a senior economist at Pictet Wealth Management, told Bloomberg. “I’m still not fully convinced that the BoE will go to that extreme.”
For the BoE, the threat strategy is not new to the institution and was a house brand during the tenure of Mervyn King, governor of the bank between 2003 and 2013. The British banker named it 15 years ago in a speech that revolved around how banks Headquarters can manage expectations to achieve their goals. And he did it in a very graphic way, recalling Maradona’s goal against the English team in the World Cup in Mexico.
One of the two goals scored by the Argentine player in the game was achieved by dribbling from midfield past any British defender who came his way, using feints, until he also fooled the goalkeeper. The goal was chosen by FIFA as the best goal of the 20th century and was used by King to explain one of the strategies of a central bank. “Monetary policy works in a similar way, market interest rates react to what the central bank is expected to do,” King explained.
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Since then, the BoE’s management of expectations has been known as the Maradona Effect. “The Maradona effect has been used quite successfully in the past, but you have to be careful with it,” warns Steven Major, HSBC’s global head of fixed income. “From shouting so much that the wolf is coming, it may be that when I arrived nobody believed you,” says the expert.
The current situation faced by interest rates in the United Kingdom fits like a glove to the scenario proposed by King. In the last five months, the BoE has been threatening to apply negative rates and the market is buying it. Libor futures point to taking interest rates to zero in June and cutting the deposit rate to -0.4% next year. At a critical time for the pandemic-hit British economy and threatened by a chaotic Brexit, the Maradona effect is also keeping the pound in check, preventing it from soaring and further complicating the situation. So far the BoE is relying mainly on debt purchase programs to support the economy.
Tony Yates, an economics professor and former BoE fellow who also helped write King’s 2005 speech, questions whether the bank is putting Maradona’s strategy into practice and points out that Bailey’s threats may be due to the Lack of experience on the job. “I never thought that Maradona’s goal was a good analogy,” Yates recalls the example of his boss. “Maradona managed to deceive the whole world, the central banks should try to do the opposite, communicating what they are trying to do clearly.” Maradona’s goal was wonderful, but the one that helped England out of the World Cup was done with his hand, fooling the referee. Known as the Hand of God caused pain and frustration to many English fans.
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